Evolution of the Perfect Institution

Secure Place in an Unfamiliar World

"In effect, then, self-regulation today is at a crossroads...How well we all buckle down and cooperate may very well determine the thrust—and even the survival—of responsible self-regulation in our industry for years to come."

Although the unfixing of commission rates on "Mayday" 1975 seemed at the time to be the signal event of the year, of much more lasting impact on the SROs generally was the enactment, a little over a month later, of the Securities Acts Amendments of 1975.

The 1975 Securities Acts Amendments provided for the creation of the Municipal Securities Rulemaking Board, a new type of SRO. Its chief impact, however, was that Congress substantially strengthened the authority of the SEC and greatly restricted the freedom of SROs. The SEC was authorized to initiate as well as approve SRO rulemakings; the SEC's role in SRO enforcement and discipline was expanded. In addition, the 1975 Amendments required SROs to include outside representatives on their boards of directors, thus extending the federal government's reach into the structure of SRO governance.41

The 1975 Amendments also empowered the SEC to effect the unification of an increasingly fragmented securities market into a "national market system." The SROs heeded this directive by creating the Intermarket Trading System (ITS), which linked the NYSE and the regional floors in 1978. The SEC also acted to extend its purview through the Market Oversight and Surveillance System (MOSS), tested in the early 1980s. Neither proved effective, and for much of the next two decades, the SEC more effectively stimulated competition than it countered fragmentation. After 1975, therefore, it was more often competitors than regulators who influenced the evolution of the NYSE.42

In the 1970s and 1980s, NYSE conservatism became a liability as new competition arose. In 1971 came Nasdaq, an electronic system that linked buyers and sellers through "market makers" who maintained a bid and ask spread. Although the NYSE's continuous auction provided better price discovery for heavily-traded stocks, newer thinly-traded issues gravitated to Nasdaq, which was better able to support them. By the 1990s, Nasdaq had sewn up the market for high growth "tech stocks."

A different kind of competition came from the Chicago Board Options Exchange, which began trading listed stock options in 1973. This touched off a steady escalation of trading in derivatives—contracts to buy or sell often tied to NYSE stock prices—that depended heavily on mathematical models, ever faster computerized trading, and increasingly interlinked equities and options markets. The first big failure of this new market came in October 1987 when the Dow Jones Industrial Average fell 22 percent in one day, specialist firms were overwhelmed, and many wondered whether the NYSE was outmoded.43

The specialists helped effect change by merging, and by the early 2000s NYSE trading posts were dominated by a handful of firms, most owned by big brokerages. The NYSE redoubled its investment in technology, replacing the Designated Order Turnaround system created in the 1970s with a much larger capacity SuperDot system.

By the 1990s, technology had revolutionized NYSE market capacity. Since 1962, the average trade had increased from 204 to 1,441 shares and block trading (of 10,000 or more shares) had doubled. But true electronic trading, already reshaping other markets, was hardly considered at all. The fixes still drove most business to the floor. When it came to governance, despite 65 years of evolution, NYSE floor members still ruled. Whether they or the SEC would be the most influential participants in the public/private partnership remained to be seen.44

Galleries

Permission for Use

The virtual museum and archive is copyrighted by the SEC Historical Society. The Society reserves the right to restrict access to or use of the museum by any user at any time.

Users are prohibited from sharing or downloading any material for publication or commercial purposes without written permission from the Executive Director. Requests for permission must be submitted by email and specify the material requested and for what purpose.

Material used with the Society's permission should be credited to: www.sechistorical.org.